Explanation

This risk was not identified in the FDD package. Item 20 data indicates the franchise system has been stable or slightly shrinking in size, not undergoing rapid expansion. Rapid growth can sometimes strain a franchisor's ability to provide adequate support to all franchisees. It is a positive sign that this franchisor does not appear to be overextending its resources through excessively fast growth.

Potential Mitigations

• When evaluating any franchise, your business advisor can help assess if the franchisor's growth rate is sustainable.
• Your accountant should review the franchisor's financials to see if they are investing in support infrastructure to match growth.
• Always ask existing franchisees about the quality of support to see if it has changed as the system grows, with guidance from your attorney.

Explanation

This risk was not identified. Item 1 indicates that Winmark has been franchising this concept since 1994 and has extensive experience operating multiple franchise brands. A long operational history can suggest a more stable, proven business model and developed support systems. This contrasts with new or emerging systems, which may carry higher risks due to a lack of a long-term track record.

Potential Mitigations

• For any new franchise system, your attorney should scrutinize the experience of the management team in both the industry and franchising.
• With a new system, your accountant should pay special attention to the franchisor's capitalization and financial stability.
• Speaking with the very first franchisees of a new system is critical for due diligence, a task your business advisor can help with.

Explanation

This risk was not identified. The business model of buying and selling used musical instruments, as described in Item 1, is an established retail segment rather than a new or trendy concept. A business with sustained consumer demand is generally less susceptible to the risks of a fad, which can see a rapid decline in popularity after an initial surge, potentially jeopardizing a franchisee's long-term investment.

Potential Mitigations

• When considering any franchise, engage a business advisor to research the long-term market demand and cyclical nature of the industry.
• Your financial advisor can help you assess the business model's resilience to economic downturns and changing consumer tastes.
• Your attorney can review the franchise agreement to see if you have any flexibility to adapt your product mix to local tastes.

Explanation

This risk was not identified in the FDD package. Item 2 details the backgrounds of the executive team, revealing extensive and long-term experience with both Winmark and the franchising industry. An experienced leadership team can be a significant asset, potentially providing stable governance, proven systems, and knowledgeable support for franchisees, which is often a key factor for success in a franchise system.

Potential Mitigations

• Always have your business advisor thoroughly vet the management team's background listed in Item 2 for any franchise opportunity.
• Your attorney can help you formulate questions for existing franchisees about their confidence in the leadership team's direction.
• If management is new, an accountant should review their past performance and the company's financials for signs of stability.

Explanation

This risk was not identified. Based on the information in Item 1, Winmark appears to be a publicly-traded company, not one owned by a private equity firm. This is important because PE ownership can sometimes introduce a focus on short-term returns that may not align with the long-term health of franchisees. Publicly-traded companies have different governance and reporting structures which can provide more transparency.

Potential Mitigations

• If a franchisor is owned by a private equity firm, your business advisor should research the firm's history with other franchise brands.
• Your attorney should carefully review the transfer and assignment clauses in the franchise agreement for any signs of an impending sale.
• Engage your accountant to analyze whether PE ownership has led to cost-cutting in franchisee support or increased fees.

Explanation

This risk was not identified, as Item 1 of the FDD clearly states that Winmark does not have a parent company. Proper disclosure of parent companies is important because a parent's financial health and strategic decisions can significantly impact the franchisor subsidiary. The absence of a parent company simplifies the corporate structure and means the franchisor's own financial statements represent the ultimate financial backing of the system.

Potential Mitigations

• Your attorney should always verify the corporate structure disclosed in Item 1, especially if the franchisor is a newly formed entity.
• If a parent company exists and provides a guarantee, your accountant must review the parent's financials for stability.
• It is important to understand with your attorney whether the parent company has any legal obligations to support the franchisee.

Explanation

This risk was not identified. Item 1 indicates that Winmark does not have a predecessor that requires disclosure. A predecessor is a company from which the franchisor acquired the business, and its history can be relevant. The absence of a predecessor simplifies the due diligence process, as the franchisor's own history of litigation (Item 3), bankruptcy (Item 4), and franchisee turnover (Item 20) represents the complete history of the system.

Potential Mitigations

• If a franchisor discloses a predecessor in Item 1, your attorney should carefully examine the predecessor's litigation and bankruptcy history in Items 3 and 4.
• With a business advisor, you should investigate the predecessor's reputation and the circumstances of the acquisition.
• Asking long-term franchisees about their experience under a predecessor can provide valuable insights.

Explanation

This risk was not identified. Item 3 of the FDD states that there is no litigation that requires disclosure, and Item 4 shows no bankruptcy history. A clean litigation and bankruptcy record is a positive indicator. A pattern of lawsuits, especially those initiated by franchisees alleging fraud or misrepresentation, can be a major red flag about a franchisor's practices and system health.

Potential Mitigations

• For any franchise, your attorney must carefully review all litigation details in Item 3, paying close attention to claims of fraud or breach of contract.
• Even if no litigation is disclosed, a business advisor might recommend searching public court records for any legal disputes.
• Speaking with former franchisees can sometimes reveal disputes that were settled before becoming publicly disclosed litigation.